Highwoods Properties Inc (HIW) 2008 Q3 法說會逐字稿

Good morning and thank you for holding. My name is Bernice and I will be your conference operator today. At this time, I would like to welcome everyone to the Highwoods Properties' third-quarter results conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Ms. Zane, you may begin your conference.

Thank you and good morning, everybody. On the call today are Ed Fritsch, President and Chief Executive Officer, Terry Stevens, Chief Financial Officer, and Mike Harris, Chief Operating Officer.

If anyone has not received a copy of yesterday's press release or the supplemental, please visit our Web site at www.Highwoods.com or call 919-431-1529 and we will e-mail copies to you.

Before we begin, I would like to remind you that this call will include forward-looking statements concerning the Company's operations and financial condition, including estimates and effects of asset dispositions and acquisitions; the cost and timing of development projects; rollover rents; occupancy; revenue trends, and so forth. Such statements are subject to various risks and uncertainties. Actual results could materially differ from those currently anticipated due to a number of factors, including those identified at the bottom of yesterday's release and those identified in the Company's annual report on Form 10K for the year ended December 31, 2007 and subsequent reports filed with the SEC. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

During this call, we will also discuss non-GAAP financial measures such as FFO and NOI. Definitions of FFO and NOI and an explanation of management's view of the usefulness and risks of FFO and NOI can be found towards the bottom of yesterday's release and are also available on the Investor Relations section of the Web at Highwoods.com.

I will now turn the call over to Ed Fritsch.

Good morning and thank you for joining us today. We reported solid financial results with FFO of $0.71 per share for the quarter and $2.11 per share for the first nine months of the year. Third-quarter FFO from core operations was $0.68 per share, an 11% increase from the third quarter of 2007.

Based on our performance year-to-date and our outlook for the rest of the year, we have narrowed our '08 FFO guidance to $2.73 to $2.76 per share. This is within the range of the FFO guidance we provided in July of $2.70 to $2.78 per share.

As we noted in yesterday's release, our successful $195 million equity offering in September is expected to be dilutive to FFO for the full year by about $0.02 per share, and that is reflected in this narrowed guidance. We expect to publish our '09 FFO outlook in January, which is consistent with when we routinely provide annual guidance.

Other highlights in this quarter included a 120 basis point increase in occupancy from the third quarter of 2007 to 91.6%, a 3% increase in average cash rental rates for all in place leases, and an 8% increase in GAAP rents for office leases signed in the quarter.

Our balance sheet was further enhanced this quarter as a result of an equity offering, and we quickly deployed $52.5 million of the proceeds in an accretive repurchase of 53,845 shares of our 8-5/8% Series A preferred Stock. By buying these shares at 97.5% of their liquidation value, the annualized yield to our company is 8.9%.

Kudos to Terry and our treasurer, Hugh Esleeck and in-house counsel Jeff Miller for the crisp execution of the equity offering and for negotiating the repurchase of our Series A preferreds. It was good work, good timing, and it certainly increased our dry powder.

Another third-quarter highlight was the opening of the office component of RBC Plaza, our 33-story mixed-use development that is now the tallest building in Raleigh. Its 277,000 square feet of office space is 97% leased to three customers, RBC Bank and two distinguished law firms. The weighted average lease term of these three customers is 16.5 years.

We also closed on the sale of the first RBC Plaza condo on October 13. Through yesterday, 16 units or 11.5% of the total have already closed. Construction of the units is progressing nicely, and we expect to close between 60 and 70 units in total in this calendar year for gains of $3.3 million to $4 million to be recorded in the fourth quarter.

We completed one acquisition subsequent to the end of the quarter, the PennMarc Centre office building in the Poplar Corridor in Memphis, which is the most highly desired office location in the city. In exchange for this strategically located infill property, we issued 183,587 operating partnership units and assumed $7.8 million of 8.15% secured debt that matures in February of 2016. We are also spending an additional $1.7 million in near-term for building upgrades and other costs.

This building was not on the market. Rather, the property was owned by a family with long-term roots who were not looking to sell until Steve Guinn, our Memphis division head, knocked on their door. The ability to offer OPU units gave us a distinct advantage, as the seller was definitely motivated by the ability to defer the tax gain. With the acquisition of the PennMarc building, we now own eight office buildings in the Poplar corridor, encompassing 840,000 square feet that are, on average, 93.5% occupied, while occupancy in the sub market as a whole is 91%.

Our disposition of activity in the third quarter was minimal. We sold our last industrial building in Winston-Salem, a 250,000 square foot building, for gross proceeds of $8.2 million, rendering a $3.2 million gain. Year-to-date, we've sold $36 million of properties. While we continue to market select noncore assets, we all know very little is trading anywhere. As a result, we have lowered the high end of the range of our '08 dispositions from $100 million to $50 million.

Out of $336 million pipeline is 71% pretty preleased, a 500 basis point increase over the past three months. The projected in-place stabilized cash yield is 9%. First-generation leasing has slowed as customers have indicated a high desire to sit tight in their existing space. The pricing gap between first and second gen space remains wide at roughly 20%-plus. While this defines a more shallow prospect pool for first gen space, it does significantly fortify our ability to retain customers in second gen space. As I've said in the past, this is the widest gap I've seen in my 26 years in real estate.

During the downturn, we expect to benefit from having sold $770 million of non-core assets and delivered $505 million of high-quality, well-leased development over the past three-plus years, which we believe will result in a more stable cash flow.

Our largest customer, the federal government, currently represents 7.6% of our annual revenues. This will go to 8.7% after two current development projects deliver -- the FAA building in Atlanta and the FBI headquarters in Jackson. We've worked hard to grow the GSA piece of our business, which not long ago represented less than 3% of our annual revenues. An estimated 11% of our total 2009 annualized revenues will come from government sources.

We believe that every real estate cycle presents opportunities, and we are in a favorable position to capitalize on them. Our strong balance sheet and access to capital should provide an advantage to us on a number of fronts. First, we are marketing the benefit of our financial stability with both existing and prospective customers. Our leasing agents are emphasizing the strength of our balance sheet and our ability to accommodate customers' long-term space needs. It is our view that customers prefer to do business with a financially stable landlord. Second, our strong balance sheet will differentiate Highwoods from local competitors when competing for build-to-suit projects that may come to market over the next 12 months. Third, with regard to strategic infill acquisition opportunities, we are prepared to move quickly, but judiciously, if assets become available at pricing attractive to us.

In all cases, our approach remains disciplined and we recognize that liquidity and dry powder are more important today than ever. These are difficult times, no doubt about it. The absence of positive absorption, lack of job growth, and the instability of capital markets create uncertainty. These conditions have the potential to erode market fundamentals for all of us. However, while we can't fully predict future market conditions and when this economy will begin to recover, our cycle-tested management team will focus on those things we are able to influence and control, such as customer satisfaction, tenant retention, expense management and the very disciplined use of capital.

Mike?

Thanks, Ed, and good morning, everyone.

Leasing activity this quarter was decent, particularly in the current economic environment, but down from our previous four quarters. We signed 123 leases totaling 972,000 square feet of first and second generation space, 62% of which was office space. This compares to 1.6 million square feet of first and second gen space leased in the same quarter a year ago.

Customers are generally sitting tight, uncertain as to the direction of the economy. While we are definitely seeing fewer expansions from existing customers, we are also not seeing widespread contractions either. The average term for second-gen leases signed was 4.5 years, above our 5-quarter average of 4.1 years.

Four of our ten markets reported positive absorption in the quarter -- Raleigh, Memphis, Kansas City and Greenville. However, in the aggregate, absorption on all of our markets combined was -900 square feet. This is not surprising, given that office absorption across the nation was positive by an anemic 2 million square feet.

In all of our markets except Winston-Salem, our office occupancy continues to be higher than the market as a whole by over 400 basis points on average. Right now, sublease space is not a significant market or Highwoods issue. That's not to say it won't become one, but it is doubtful it will grow to the magnitude we saw back in 2002 and 2003, given the general absence of overconsumption this cycle.

At September 30, in our top five office markets on average, sublease space was about 1.4% of the total market, a 20 basis point increase from a year ago.

While we are on the subject of sublease space, I'd like to comment on a news article that appeared in last week's Tampa Bay Business Journal stating that T-Mobile was planning to close its call center in our Tampa Bay Park. Unfortunately, the reporter got it wrong. T-Mobile has informed their employees and us that they have no plans to close this call center, and in fact they are working to further position themselves as a major telecom player. They are exploring the opportunity to sublet a minority portion of this space. T-Mobile's 92,000 square foot lease at Tampa Bay Park runs through November 2012.

In our top five markets combined, construction as a percent of total market was 2.5%, a 110 basis point decline from a year ago and a 40 basis point drop from the second quarter. With the world upside down, the lid has been effectively nailed on new spec construction starts, and new construction as a percentage of market should continue to shrink for the foreseeable future.

Our own development starts this year are down significantly, $47.5 million year-to-date versus $124 million last year and $362 million in 2006. Pre-leasing in our development pipeline currently stands at 71%, and we are still making deals on our first-gen space, although at a slower pace than previous quarters.

Looking out over the next 12 months, we don't anticipate starting any spec development, although we continue to pursue highly pre-leased, i.e. north of breakeven on a cash basis, and build-to-suit projects. We believe we will have a competitive advantage because of our dry powder and strong balance sheet.

Turning to our operating metrics this quarter, average in-place cash rental rates across our total portfolio rose 3% from a year ago, and average in-place cash rental rates across our office portfolio were up 3.8% from the same period a year ago. Cash rent growth for office leases signed this quarter declined 2.8%, while GAAP rents for office leases signed this quarter were up 8.1%. CapEx related to office leasing was $8.51 per square foot in the third quarter, slightly below the five-quarter average of $8.72 and well below our typical $10 to $12 per square foot range.

While demand for office space has waned from a year ago, it has not turned into a market free-for-all where excessive lease concessions are the norm. Free rent is becoming more prevalent, but asking rental rates are relatively stable, and the wide spread between first and second gen space continues to work in our favor.

Tenants are hesitant to commit their own capital to lease space for TIs and are putting pressure on landlords to do turnkey deals. In an odd way, this turn of events could work in our favor. Many of the local landlords don't have the capital to fully fund these higher TIs. Highwoods can and will for economically sound deals.

We are projecting occupancy to decline in the fourth quarter and expect to end the year with occupancy between 90.5% and 91%. This is in part due to a 133,000 square feet of industrial space that is expiring, most of which is in Greensboro.

Next year, we have 3.8 million feet of space expiring, representing 13.2% of annualized cash revenue. Our top 10 office expirations represent about a quarter of the total expiring revenue, and we are working hard to renew or re-lease this space. We are in active talks with all of these customers, and our leasing agents have already received indications that at least half intend to renew.

Our management team and virtually all of our seasoned leasing agents have experienced economic downturns before, and we are prepared to deal with the market pressures. Where possible, we are trimming operating expenses and G&A. Our leasing personnel have been empowered to aggressively pursue every viable lease transaction with the intent of winning more than our fair share and preserving occupancy.

There is no doubt that we are going to see some transactions that a year ago would have raised some eyebrows. But as we all know, the world has changed in the last 12 months. We must be nimble, and when we have an opportunity to make a deal, we will be decisive.

Terry?

Thanks, Mike. As Ed mentioned, we had solid financial and operating results for the third quarter and first nine months of 2008.

FFO per share for the third quarter was $0.71, which compares to $0.69 in the preceding second quarter and to $0.59 in the third quarter of last year. Core FFO was $0.68 per share and is up $0.07 from third quarter last year, and in line with core FFO in the first and second quarters of this year.

We define FFO from core operations to exclude lease term fees, land sale gains or impairments, preferred stock redemption and repurchase charges, impairments on depreciable income-producing properties, and similar items. This growth trend in core FFO results primarily from the impact of well-leased development projects coming online, occupancy growth and lower costs on our debt and preferred capital.

While core FFO in the fourth quarter is expected to be down compared to third quarter, primarily due to dilution from the common stock offering and higher operating expenses, we expect full-year 2008 core FFO to be 10% higher than full-year 2007. 2007 core FFO was 9% higher than 2006.

Total revenues from continuing operations were up $8.6 million this quarter or 8% compared to the same period of 2007. $6.8 million of the increase came from development properties not yet included in our same-property portfolio and $1.8 million came from our same-property portfolio, mostly reflecting higher average occupancy during the quarter and from rental growth.

Same-property cash NOI, which excludes straight-line rents and termination fees, was up 1% for the quarter compared to the same quarter last year. As we indicated on our last conference call, we typically have higher operating expenses in the second half of the year due to seasonality. Accordingly, same-property NOI growth in the third quarter was lower than the first and second quarters of 2008. We expect the fourth quarter to have a similar trend as the third quarter, due to slightly lower average occupancy and from higher operating expenses compared to the fourth quarter of last year. These higher operating expenses for the fourth quarter include real estate taxes, utilities, and certain planned repair and maintenance costs. Same-property cash NOI growth for the full year should end up around the middle of the 1.5% to 2.5% range we gave as part of our FFO guidance at the beginning of the year.

G&A costs for the quarter were approximately $800,000 lower than the same quarter in 2007. The primary reasons were nearly $700,000 from lower deferred compensation expense and about $500,000 from lower audit and legal expenses. These reductions were partly offset by the 2008 cost-of-living increases we implemented earlier in the year, higher healthcare costs, and incentive compensation.

Our liabilities related to previously deferred compensation are adjusted each quarter based on the changes in the value of the unrelated mutual fund investments held by the Company on behalf of participants in our nonqualified deferred comp plan. These adjustments are recorded in G&A. It is important to note that these effects in G&A are exactly offset by changes in the fair value of the mutual fund investments, which changes are recorded to other income. So there is no net income from this affect to -- no impact to net income or to FFO.

G&A for the nine months is also lower from the same period last year by $2.1 million, of which $1.5 million is related to these deferred compensation effects. Moreover, given the reduction in overall stock market valuations that have occurred since the end of the third quarter, there could be further reductions to G&A expense and also reductions to other income in the fourth quarter if overall market valuations stay below their third-quarter levels. G&A for the nine months also benefited from 2.2 million in lower audit, legal and consulting fees, partly offset by the same increases I noted above for the quarter.

Net interest expense this quarter was down $0.015 per share compared to last year, due to lower average interest rates partly offset by lower capitalized interest. As development projects are placed in service and their occupancy increases, the interest capitalization gets phased out.

The weighted average interest rate for all our debt was 6.12% for this quarter, down from 6.59% one year ago but up from the preceding second quarter due to recent increases in 30-day LIBOR. $125 million of our floating-rate debt is currently hedged under swap agreements with major bank counterparties. The weighted average LIBOR rate bank is 2.78% under these swaps.

Preferred dividends were lower by $229,000 this quarter compared to last year as a result of our repurchases of Series A preferred Stock.

We know that financing and capital markets are on everyone's mind, and I have more extensive comments than normal on these topics. First, as Ed noted, we were very pleased with the timing and execution of our recent $5.5 million common stock offering and our creative repurchase of Series A preferred Stock. Remaining $142 million of the offering proceeds were used to pay down our revolving credit facility. We plan to re-borrow these proceeds from the revolver in the first half of 2009 to pay off $50 million in bonds and toward the payoff of a secured loan. After the proceeds are fully deployed by mid-2009, the common offering will be accretive to FFO by about $0.01 per share and accretive to total cash flow by about $6.5 million, both measured on an annualized basis. Until then, the offering is dilutive to FFO by $0.025 per share during the first -- during the last 3.5 months of 2008, and about $0.02 per share over the first four months of 2009.

The common stock offering provided us with significant financial resources for future opportunities, as well as enhanced liquidity for these uncertain times, times when cats and dogs are living together and there is mass hysteria, with my apologies to Bill Murray.

Turning to future refinancings, we have no debt maturities in the fourth quarter of 2008. In May 2009, our $450 million unsecured revolving credit facility is scheduled to mature, but we have a one-year extension right at our sole option that we currently plan to exercise. We currently have $320 million available on this facility.

We included, in the supplemental on Page 8, a list of the banks that participate in our credit facility and their aggregate commitments and outstanding borrowings as of quarter end. Current borrowings on the facility today are essentially unchanged from that date.

We believe we have an excellent lineup of banks -- Bank of America, Wells Fargo, Wachovia, BB&T, PNC Bank, RBC, Regions, Union Bank of California, and others.

Other 2009 maturities include a low-leverage secured loan bearing interest at 7.8% that will have a principal balance of $107 million when it becomes prepayable without penalty in May. Its contractual maturity date is November. In addition, we have a $50 million bond bearing interest at 8-1/8% that matures in January, 2009. As I noted, we plan to re-borrow the common offering proceeds from the credit facility to pay off these loans.

We have $17 million outstanding on a $28 million construction loan related to the RBC residential condo project, which will be paid off when approximately half of the condos have closed. We also have about $57 million available on a secured construction facility which matures in December 2010 and can be extended for up to two additional years. Given our current $377 million of aggregate funding availability, combined with proceeds from future dispositions and other potential capital sources, we are well-positioned to handle our refinancings during the next two years, fund the $95 million of development pipeline costs that remain to be incurred as of September 30, and have additional dry powder left over to remain flexible and take advantage of accretive opportunities that may arise.

We believe we have access to a range of additional capital. We believe we can refinance existing or obtain new secured loans from insurance companies and other secured lenders, although the terms would likely be more onerous than we've normally achieved.

61% of our current NOI stream comes from properties that are not encumbered by secured loans, and that ratio would grow to 66% when the secured loan is paid off next year. We have a large and growing pool of unencumbered assets, which is a significant financing and credit strength of the Company.

We can access JV capital and have a number of JV relationships. This was evidenced by our $113 million Forum acquisition earlier this year. While unsecured bonds are quite expensive now, we did tap that market in early 2007, and there are signs that it may be falling and may present more reasonable pricing later in 2009. We have positive cash flow after recurring CapEx and dividends, and we are also working to sell non-core assets, although as Ed mentioned, such sales have slowed down from our prior expectations.

So all in all, with a manageable debt maturity schedule and a range of capital sources, we are well positioned today. As I've noted and as you can also determine from the information provided on Page 2 of the supplemental, we continue to be CAD positive and we expect to remain CAD positive for the foreseeable future. We do have a higher level of building improvement costs coming through in the fourth quarter, which have been planned, so the CAD trend through the first nine months is somewhat higher than what we expect for the full year, which will still be meaningfully positive.

We tightened 2008 FFO guidance to $2.73 to $2.76 per share, increasing the low end of our previous guidance by $0.03 and lowering the high end by $0.02, primarily as a result of the dilution from the common stock offering last month. We are now expecting to book more gains in 2008 on the RBC condos due to timing of closings, but this may be partially offset by a $1 million impairment in the fourth quarter from a non-core land parcel which we may sell for over $6 million in cash proceeds.

Operator, we are now ready for Q&A.

Thank you. (Operator Instructions). Lou Taylor, Deutsche Bank.

Mike Harris, can you just talk a little bit about demand? I mean, is it just -- is everyone sitting on their hands everywhere, or are there any markets that are showing some signs of life vis-a-vis some others?

Lou, I would say demand as I mentioned has waned pretty much across the board. I think we still see activity, particularly here in Raleigh, because the economy is reasonably good. That's offset a little bit by the fact that we have more supply here to deal with, as there was a lot of new construction that came online back in late '07. But I think it's the best of the markets from a demand standpoint.

And then --

Excuse me. It also goes submarket by submarket. For example, you would still see pretty good demand in the Poplar corridor in Memphis, West End area of Nashville that's good, but those would be more or less the isolated cases.

Okay. Then the second question is for Terry. In terms of your line, you've got Wachovia and Wells in there, about $50 million committed apiece. Any sense at this point from the merger, how that commitment would change? Would Wells then be in there at $100 million, or are very kind of looking for -- to reduce that exposure?

Lou, we have not had any discussions with them, but I can tell you that, in the past, we actually had a bank term loan -- this goes back maybe two years ago or so -- that Wells was the sole holder of. So in the past, Wells has indicated a real willingness to extend credit to the Company in amounts above their $50 million allocation in the credit facility. So it's hard to say when the time comes to renew the line, but based on the past, I would be optimistic.

Just as a reminder, we have a one year (inaudible) sole option to extend that credit facility into 2010.

Okay, thank you.

Irwin Guzman, Citi.

Good morning. This is David [Chandless] here with Irwin. It looks like you guys haven't updated the cap rates on your NAV page since February. So given that cap rates have likely increased, if you had to revise that, how much do you think they've gone up?

Yes, David, this is Ed. We have a footnote at the top of the page that basically explains and reiterates what we've said on subsequent calls about our philosophy with regards to the NAV page, because there was a point in time where we were changing it by the quarter and it became more of a topic of discussion then the Company's quarter-to-quarter overall operating performance.

You know, we think that, clearly, they've moved, but the purpose of that page is to provide all of the data so if anybody wants to make their computation, all of the information is there and they can plug what they believe to be the respective cap rates.

We think cap rates have moved some. CB came out in a call last week and along with Torto and they said they -- across the board basically said in the core markets that it's 7%, in the secondary markets, it's 8%, and in the tertiary markets, it's 9%. You know, I don't think anybody could argue with them, but there's just so few pieces of real estate trading that who's to know? There just aren't enough deals.

Okay. For the secured debt maturing next year, what's the leverage on those assets maturing?

The leverage is well below 50%; I would say in the mid to low 40s. So it's a fairly low-levered loan, as I indicated.

James Feldman, UBS.

Thank you very much. Can you guys talk a little bit about where you think effective rents have moved from their peak, and how much TIs and free rent periods have gone up?

Yes, Mike, maybe I will start and you -- Jamie, I think that second-gen space has held fairly well. We had forecasted at the start of the year, for example, cash rent growth of minus 3% to 0%. We are averaging about 2.5%, 2.7% through the first three quarters. We haven't seen a dramatic move in the actual face rate. I think that a component of that can be credited towards the fact that the cost to go into first-generation space is so materially greater, as I referenced in my comments, that the first-gen space isn't drawing renewals out of the second-gen space.

Given that, however, we are seeing more concessions than we show in our supplemental. The concession number across the board hasn't changed dramatically. We are at $0.22 this quarter and the five-quarter average is $0.24, but the number of deals that are in the market today are less than just what we saw two months ago. So, I think we will see some creep in concessions, which would affect the overall net effective rate, but I don't think it will be a dramatic move.

On the TI component, the costs have basically held with regard to construction pricing, but we are -- I think the baton has been fully handed from the landlord to the customer with regard to going from an allowance, a specified allowance, more towards either a greater allowance or a predefined turnkey deal.

That's particularly true I believe on relapsed space where the tenants are coming in to back-fill space. They just don't want to commit their capital to it, so it's putting on a landlord maybe not getting as much amortization of above-standard TIs we would like and what we saw in the past.

Jamie, I would want to point out that the customers that are renewing, you've observed that our term has been a little bit shorter. This quarter, we had a good term average of 4.5 years, but those who are wanting to sit tight, they don't want to spend capital and we are not spending as much capital. As you can see from the dollars we've spent, this quarter where we've spent $8.51 versus the five-quarter average of $8.72. So the spending has been in line with the term of the deals.

I think the key is flexibility. The tenant really was looking for that just with the uncertainty of the economy, and is not as interested in going out long term.

Then I guess the follow-up question -- are you guys in a position where you would want to lead the market on TIs, just to get deals gone, or kind of like what is your -- what will your approach be as things get worse?

I don't know about "lead the market". You know, what we want to do is we want to get more than our fair share of the prospects that are out there in the market. We think that we have some assets that differentiate ourselves already that put us in a lead position with regard to infill locations. But you know, we don't necessarily want to have a reputation for the most free rent and the most TI when we already have some of the assets that are, we feel, better than some of the competition in certain infill locations.

I think, if we had a marginal space in the building, even a good space, we recognize occupancy is key today and we're not going to lose a deal over $0.50 or $1.00 of TI if that's what it takes to make the deal, or even maybe a month's free rent. That's where I mentioned that we've really empowered our leasing folks to make deals. Time is just not your friend in a market like this, so when we have an opportunity to close a deal, let's do it.

I do think, Jamie, that us actively marketing the concept that we are a very financially stable landlord, that those who are looking to get good services, good attention and what they need today, in return we want a long-term commitment for the credit. We are in a position to do that more so than local competition.

Okay. Then finally, on the last call, Ed, you had talked about acquisitions possibly opening up and being a better use of capital. Can you just give us an update on how that market looks today?

Yes, no change, Jamie. We still haven't seen any distressed sellers. The spread between the bid and that ask remains very wide. We are thinking that may come along, and certainly the tougher the economy gets, and the more that pro formas underperform from the underwriting, and when debt instruments become irreplaceable, we expect to see some distressed sellers.

But what I would want to underscore, as we've talked in the past, the difference between a distressed asset and a distressed seller. We want to stay in the business of getting out of distressed assets, but we are very interested in looking at our opportunities with regard to distressed sellers, where it's a core asset that would lift the overall average of our asset portfolio and would be in keeping with our strategy of an infill location.

So these opportunities may come along in the next 12 to 18 months, as these debt instruments expire, and when an owner looks at their pro forma and sees how it's underperforming, compared to underwriting, plus a more expensive debt replacement.

Okay, thank you very much.

(Operator Instructions). Wilkes Graham, FBR.

There's been a lot of talk recently about how tenants have been coming in at the last minute of lease negotiations and trading down the rent and asking for a 10% or 15% cut, and they've been getting it. There's obviously -- you know, New York is kind of in its own world up there. But are you seeing any of that in your lease negotiations, or has the push really just been on the TI side?

I think that, mostly, it has been a fair, mutually beneficial deal. We haven't seen anybody coming in last second and doing a re-trade with the possible exception of maybe some retail in Kansas City. But we haven't seen last-second pulling the tablecloth out from underneath the dishes type of thing. Clearly, when third-party broker tenant reps are involved, they understand market conditions and there's a good negotiation, but we are not in a position where we are seeing a last-minute gyration like that.

Okay. Do you see the recent acquisition, being from a small private owner that just maybe didn't want to own the real estate any more and had the opportunity to take the OPU units and defer the gain -- is there an opportunity to do that maybe in the early stages of -- or maybe before the acquisition markets really open up, or was that more of a one-off?

I think 100% of the credit of that needs to go to Steve Guinn. As I mentioned in my comments, you know, this property wasn't being marketed; it wasn't for sale, wasn't rumored to be for sale. What Steve is trying to do is create some critical mass. As I mentioned, we are now up well over 800,000 square feet in this section of the Poplar corridor. He went and knocked on their door, introduced them to the concept of the OPU. Over a long period of time and good, proactive effort by him, he created his own luck and made something happen. So huge kudos for Steve for being out from behind the desk and making that happen.

Given the current stock price, we don't see the OPU currency to be an effective negotiating tool for us near-term.

Sure, okay. Thank you.

Chris Lucas, Robert W. Baird.

Terry, just on the line, is there any reason to be holding negotiations at this point to establish a new line at this point, or is that -- I mean, are you doing any of that at this point?

We haven't done that, Chris. We do keep in touch obviously with the lead bank on the facility, which is Bank of America. We talk with all of the banks just on a number of matters, but we haven't started formal negotiations yet on the line. I think that's something that we will do beginning next year sometime. Hopefully, the markets will begin to get a little bit better than they are today.

As we mentioned, we do have the extension option, which puts us out until May of 2010. We're hoping that these conditions just won't be then what they are now.

I think they would have the same answer, that it is just too early for us to sit down and start to define that. But of course, as Terry said, having discussions with them in general and staying close to our banks with regards to business activity is something we've routinely done.

I have talked to some other banks that are not in the facility today. There's a couple of fairly large banks out there that have told us that they have an interest in participating. I could be wrong on this, but right now, I feel pretty good that, when the time comes to renew, that we can get something of a roughly similar size, maybe with a somewhat different lineup of banks. The terms and conditions might be a little different than they are today, obviously, but I feel good about the availability.

Okay. Then just a couple o questions on RBC. What sort of contribution to NOI did you have from RBC Plaza for the quarter?

The first customer, Chris, just moved in September 15, so there's only two weeks of occupancy, and that was partial occupancy. We actually had staged; they moved into three floors and in the future weekend, they moved into another floor. Then the law firm moved in after the close of the quarter. So it was really immaterial.

Okay. Then on the condo sales, do you have any contract cancellations at this point?

We've had one default where an investor for one of the one-bedroom units walked from his deposit of -- it was a 10%, since he was an investor, earnest money. So he walked from $25,000.

Then how does the pay-down on the settlement proceeds work on the loans? On your construction loan there?

The way it basically works is that all of the proceeds from sales go first to pay down the loan, and then once the loan is paid off, then they would be distributed out to us and our minority partner in this project.

Chris, when we are about 50% closed on the total number of units, which is in that 60 to 70 range, we will be done with the loan.

You will be booking gains, though, from that into FFO? Is that correct?

We will book pro rata share of the expected gains, yes, on every unit that closes. So beginning in the fourth quarter, as I said in my comments and it's part of our guidance, we do have some -- a range of condo gains included.

Thanks a lot, guys.

Cedrik Lachance, Green Street.

Just one question in regards to the unsecured financing -- Terry, can you give us a sense of the covenants that are on those loans? More importantly, where are you in regards to your covenants, so in terms of leverage ratio, in terms of debt-service coverage?

Yes, Cedrik, the ratio that's probably the most restrictive for us is the total liabilities to total assets ratio, which is less than 60%. Again, the values that are used to calculate that are based upon terms in the covenants. It's not something you would get right off the balance sheet necessarily. That's currently at 53.7% or so, and our limit is 60%. So we are pretty -- we have a fairly good amount of cushion there. I estimate we could probably add somewhere to another $400 million or more, maybe up to $500 million if those borrowings were used to acquire qualifying assets, before that ratio would begin to bump up to 60%. All of the other ratios that we have to abide by have even more cushion than that one. So that's really the one thing that governs the amount of leverage that we can put on the Company.

Okay, thank you.

(Operator Instructions). Sir, I have no more questions.

Okay. Well, I would like to think everybody for taking the time to listen, and of course thank all of my coworkers for their amazing, diligent work throughout the quarter. I look forward to seeing a lot of you at the NAREIT conference. Thank you.

Thank you. This concludes today's conference. At this time, you may now disconnect.